(Fortune) -- President Barack Obama has been trying to push through a number of epic policy changes, such as an effort (now stalled) to revamp the financial regulatory system and his pet project (now passed) to expand health insurance. But none of these endeavors will have as much impact on our nation's future as his decisions on whom to appoint to the three open positions on the Federal Reserve's board of governors. Really.
It's a crucial question because the President has a historic opportunity to alter the way this institution operates. No American President since Franklin Roosevelt back in 1936 has had so many seats to fill at once.
Among those who closely follow the Fed (yes, such people exist) there's a growing concern that Obama will succumb to the temptation to stack the Fed with doves who will keep the cheap money flowing and the good times rolling, at least through the 2012 election.
Hawks say that case is bolstered by his presumptive choice of the ultra-dovish Janet Yellen, the San Francisco Fed president, to take over as the Fed's vice chairman. Yellen ruffled inflation hawks' feathers back in February when she told reporters she'd lower rates into negative territory, if such an option existed.
But the hawks vs. doves debate is a red herring. What's really concerning is that the President will bypass trained economists and bankers in favor of consumer advocates and politically correct appointees, turning the famously apolitical Federal Reserve into a political lapdog. That's an issue that China, Japan, and the sovereign wealth funds are all worriedly whispering about right now.
Why should we care what those guys think? Because they are keeping us afloat right now. Foreigners own $3.589 trillion in U.S. Treasuries, or about half the amount of all Treasury debt outstanding. They also own another $1.318 trillion, or 16%, of agency and Government Sponsored Enterprise-backed securities.
If the foreigners lose faith that an apolitical Fed will manage our monetary policy from a neutral perspective, they will stop buying as much of our debt. Less demand means we'll have to pay higher rates to borrow, and that means it will get a whole lot more expensive to service the big fat piles of IOUs we've been stacking up.
Just think of what would happen if your home mortgage rate jumped from 5% to, say, 10% overnight. Now think of what that would mean on a $7.2 trillion mortgage. That's an extra $360 billion we'd owe just in interest costs alone. If we continue down this path, we're essentially dooming our children to a lifetime of indentured servitude to our creditors.
Business leaders worry that the wrong choices for Fed appointees could unnerve foreign buyers. "If they stop buying, we're going to be in a real pickle," says billionaire investor Wilbur Ross. "You could quickly get into a catastrophic situation."
That's why Ross sees the potential nomination of Yellen as a positive move, even though he disagrees with some of her economic leanings. Other candidates he likes include economists Austan Goolsbee, Laura Tyson, or any of the regional Fed presidents. "They don't have to be rightwingers. They don't even need to be hawks," he says. "They just need to be professionals."
Who do business leaders privately worry about? Elizabeth Warren, for starters. The Harvard professor, who is the outspoken head of the TARP oversight panel, is an agitator for consumer protection. In a different context, her rabblerousing is a good thing. The nation needs voices like Warren's, just not on the Federal Reserve Board. Consumer protection should be a secondary role of the Fed, not one that competes with its primary goal of setting monetary policy.
Think that sounds cold and uncaring? Consider the last institutions that had dual mandates of setting sound fiscal policy and promoting the interests of American consumers: Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500). Remember how that worked out? I hope that's a lesson President Obama and his advisers are keeping in mind as they consider their nominees.